Asian Biomass Market: Growing Despite Policy Setbacks

Growing biomass demand in Asia continues to capture the attention
of the international wood pellet industry.

By Rachael Levinson | December 04, 2018

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Despite the Japanese and South Korean governments introducing policies to curb the growth of biomass power, both markets continue to expand, albeit at a slower rate than some had anticipated.

The Renewable Portfolio Standard, introduced by the South Korean government in 2012, has supported the rapid growth of bioenergy. It requires energy companies with capacity exceeding 500 MW to obtain an increasing proportion of their electricity from renewable sources. To satisfy their RPS targets, obligated companies can either produce their own renewable energy, which will earn them renewable energy certificates (RECs) per megawatt-hour (MWh) of renewable energy produced, or purchase RECs on the market. But in May, the government announced changes to the RPS, which threatened to jeopardize some planned biomass projects. The government decided to change the REC weightings of some biomass technologies. Its motivation was to reduce obligated companies’ reliance on biomass and imported materials in achieving their RPS targets, and encourage deployment of other renewable technologies.

The new REC weightings (Figure 1) apply to new biomass projects, or operating projects that wish to change their fuel type, while existing projects will continue to receive the previous REC weightings. The changes mean new, dedicated plants using imported biomass will see their support fall from 1.5 REC/MWh to 1 REC/MWh, while new cofiring and coal-to-biomass conversion projects using imported wood will now receive no support at all. However, support has increased for projects planning to use domestic, “unused wood,” e.g. forest residues.

The government has introduced a grace period, which means planned, dedicated biomass projects can still claim the old REC weightings if they secure construction plan approval before January 2019. Any projects that fail to obtain construction approval by this date will only be eligible for the reduced support. Our analysis suggests that the new REC weightings for dedicated plants will threaten their economic viability, making it vital for those in the planning stages to secure the old weightings. It is difficult to know which dedicated plants in the pipeline will be able to meet the six-month permitting deadline, but the grace period has incentivized planned, dedicated projects to move quickly with development plans. Since the announcement, GS EPS’s planned 100-MWe Dangjin 2 biomass-fired plant, SMG Energy’s 100-MWe Gunsan plant and CGN’s 109 MWe Daesan plant have all made important steps toward developing their plants, and look likely to have secured the old REC weighting. However, there are a number of other planned, dedicated plants that could be in jeopardy. We understand that Hangyang/KHNP, KOMIPO and KOWEPO/BOIM are all working to move forward as quickly as possible with their dedicated biomass projects, but have yet to make any new announcements.

In addition, the cuts to support for planned cofiring and coal-to-biomass conversion projects means GS E&R has cancelled its plans to cofire at its Donghae Electric Power plant, and KOEN will no longer convert its Yeongdong unit No. 2 from coal to biomass (it will continue to cofire biomass at the unit). Other companies that already cofire wood pellets in their coal plants to help meet their RPS targets will be unaffected by the changes, including the five state-owned generating companies that have been the main consumers of wood pellets in South Korea. Therefore, short-term biomass demand should be stable, but there has been mounting speculation that the South Korean government could soon change its policy and reduce support for existing cofirers, too. We understand that a decision is expected from the government about whether to curb cofiring in mid-2019.

Meanwhile, in Japan, higher-than-expected demand for feed-in-tariff (FIT) support from biomass projects has led the government to review its policy and take steps to control growth. By March 2017, the capacity of approved biomass projects under the FIT general wood category (which includes imported wood pellets, palm kernel shells and wood chips) was almost 12 GW, three times the country’s 2030 “best energy mix” target of 2.7 to 4 GW.

However, the latest statistics released by Japan’s Ministry of Economy, Trade and Industry show a decrease in the certified capacity of biomass projects in the FIT. The data, which was valid as of March, indicates certified capacity of general wood projects fell 38 percent from a year earlier. As of then, there was 7.4 GW of general wood approved capacity. Of that, less than 10 percent was operational (662 MW). General wood still accounts for the largest category of biomass capacity.

Several factors are likely to be behind the fall in approved capacity under the FIT, with milestone deadlines the major contributor.

New FIT projects are required to provide evidence of a grid connection agreement within six to nine months of receiving FIT certification. There was a large jump in FIT-approved capacity in March 2017, meaning all of these projects needed to secure a grid connection before the end of 2017. The data for March 2018 indicates that a significant number of those projects failed to obtain a grid connection in time and therefore lost their subsidy support.

The government also introduced more stringent sustainability requirements for palm oil projects. In March 2017, 38 percent of approved “general wood” capacity was, in fact, planned palm oil projects. In April 2018, Japan’s Agency for Natural Resources and Energy updated its guidelines for biomass power projects receiving FIT support, and introduced more stringent sustainability and traceability criteria for liquid biomass projects. Palm oil certification is still very limited in Indonesia and Malaysia, meaning sourcing significant quantities of certified palm oil would be very challenging (and costly). In 2017, around 17 percent of total plantation area in Malaysia was RSPO certified, and 15 percent in Indonesia.

Another deadline that could further impact the pipeline of FIT biomass projects is that projects approved before April 1, 2018, must have ordered equipment within two years of getting FIT certification. Only a small number of boiler manufacturers—around four or five—can provide the necessary equipment, and this will constrain the number of projects that can secure an order by the deadline. Therefore, we expect that more FIT biomass capacity will be cancelled. This likelihood has led some industry representatives to warn that boiler manufacturing capacity could pose a risk to achieving the country’s 2030 biomass power targets.

Looking ahead, the move to auctioned FIT-supported biomass projects will also greatly reduce the potential rate of biomass deployment in the FIT. METI has introduced a bidding system for general wood biomass projects with a capacity above 10 MW, and for all liquid biomass projects, such as palm oil. The quota for the first general wood auction—i.e., the total capacity of biomass power projects that will be awarded a FIT—will be 180 MW, and it will be held in December.

Despite all of the above challenges, the progression of Japanese projects continues to accelerate. It seems that almost weekly there are announcements of new projects, and those in the pipeline are reaching key milestones. Noteworthy developments in just the past few weeks include a financial close on Aioi’s 200-MW, biomass-fired power plant, Equis Bioenergy issuing a notice to proceed on a planned 50-MW power plant in Tokuyama, and Idemitsu Kosan beginning a feasibility study on a 50-MW power plant at its Tokuyama complex in Yamaguchi.

Judging by experience in Europe, it is far from surprising that the large pipeline of projects is now being whittled down. At Hawkins Wright, we have always taken this likelihood into account when forecasting biomass demand growth in Asia. Even accounting for the recent changes, there is still significant growth on the horizon. As a result, the region will soon rival Europe in terms of industrial wood pellet demand volumes.

The policy changes in both countries and subsequent impact on demand forecasts has meant Hawkins Wright has updated the policy and demand sections of its Asia Pacific Biomass Demand & Supply report, originally published in April 2018. The new, condensed, report Asian Biomass Demand is available from December 2018.